Wednesday, July 2, 2008

Analogy #190: Who's Bribing Whom?

Back around 100 years ago, San Francisco was a pretty wild place for doing business. The city was growing rapidly and it was busy putting together its infrastructure—utilities, transportation, etc.

If your company became a part of that infrastructure, you would become extremely wealthy. Therefore, companies were highly motivated to use bribery to convince the San Francisco city aldermen to include their companies in that infrastructure.

Examples of companies who were bribing city officials at the time included PG&E (Pacific Gas & Electric), Bay Cities Water, and United Railroads. United Railroads had a $200,000 pool of money just to be used for bribery (which would be a huge amount in today’s dollars).

One of the biggest scandals was in the telephone utility. Pacific Telephone and Telegraph was currently serving customers in San Francisco. Newcomer Home Telephone Company wanted a piece of the action and allegedly paid $5,000 per official to get approval, along with $125,000 for political boss Abraham Ruef. Of course, Pacific Telephone did not want to lose its monopoly, so it bribed the officials to keep out Home Telephone. They supposedly spent about $50,000 in bribes.

Home Telephone appears to have made the bigger bribes, so on March 5, 1906, the San Francisco city supervisors awarded Home Telephone Company a 50 year franchise to operate in the city.

While the city was using bribery to build up the city, Mother Nature decided to tear down the city. On April 18, 1906, little more than a month after the Home Telephone decision, San Francisco was destroyed by a great earthquake and a fire lasing four days. Shortly after cleaning up from the earthquake, the city cleaned up its government. In March of 1907, the city officials and the businessmen who bribed them were convicted in a court of law. Abraham Ruef was charged on nearly 70 counts of accepting bribes.

Although most businesses today do not resort to the level of bribery found in San Francisco 100 years ago, “bribery” is extremely common today. I’m not referring to the illegal type of bribery, but a legal form of bribery.

In reality, any time one must resort to added incentives to get a customer to make a purchase, you are “bribing” them. In essence, these incentives show that you cannot create sufficient sales at the original value, so you have to “bribe” people with something beyond the original value (such as a price cut), in order to get them to act as you want and buy your product/service.

Recently, I got a call for a time-share resort company who was willing to offer me all sorts of prizes and gifts in order to get me to drive to their resort to hear a sales pitch. All of their bribery in incentives was not enough to get me to go, though. It would take a much higher bribe to get me to overcome my lack of desire to hear their sales pitch.

The worse your original value proposition, the higher the bribe (in added incentives and price cuts) is needed to get customers interested in making a purchase. Ultimately, this cuts into your profits. Although this type of bribery will not get you convicted, it is not a very efficient way to earn profits.

The principle here is that offerings with an inherently strong internal value are typically more profitable than offerings where bribery is needed in order to create sufficient value.

Take, for example, the automobile industry. GM and Ford are currently offering huge bribes in terms of incentives and price cuts in order to sell their slow-moving gas guzzlers. By contrast, Toyota can sell all of the Hybrid Prius automobiles they manufacture at full-price (and a premium price at that).

Because the Prius is more in tune with what customers want, Toyota does not need to add any bribes to the offering. The basic offer is strong enough on its own and can command a premium price. On the other hand, the big gas guzzlers at Ford and GM are out of tune with the marketplace. Consequently, they have to load on so many bribes to move the goods that there is very little left to create a profit. As a result, GM is in serious risk of going into default, while Toyota is doing well.

This is not an unusual example. Throughout history, one can find industries where one firm has such a superior perceived value that it can sell at a premium, whereas the competition has to resort to bribes in order to get any attention. Just compare Ipod to its competitors. Or look at Virgin Atlantic versus traditional airlines, where extensive bribery through special promotions and discounts has been a financially disastrous way of life.

Although he does not look at the issue in terms of bribes, J.C. Larreche covers similar territory in his book “The Momentum Effect.” Larreche is a marketing professor at INSEAD. Based on his studies, Larreche discovered that firms which spend a lot of marketing money to “push” goods on consumers (with what I call “bribes”) do not grow as fast, have lower stock prices, and are not nearly as profitable as companies who focus on creating the types of superior values which do not require bribes.

To paraphrase, Larreche’s advice is that rather than rushing to get a product to market, one should stop and first take the time necessary to ensure that the product you have has enough intrinsic value that it will sell without the need for bribery (what he calls achieving “compelling value” or the “power offer”).

Well, that all sounds logical and intuitive—superior offerings sell better (and more profitably) than inferior values. But how do you create these compelling power offers?

There really aren’t any shortcuts. It’s a lot of hard work. I divide the work into three buckets: Left Brain (Rational) Work, Right Brain (Emotional) Work and Whole Brain (creative) Work. The idea for the first two buckets is that you have to choose a particular customer segment and then get inside their brain. You have to understand all of their needs/wants/desires as well as what triggers satisfaction.

Some of these discoveries will be highly rational. Some will be highly emotional. You need to understand both. It is not always the technologically superior product that wins. Instead, it is the product which connects best with the customer on all levels, including emotions and psyche. Apple is very good at making the connections on all of these levels. Their products are technologically great, esthetically great, and create great emotional connections with their customers (see “Reason Vs. Rationale” for more on combining both rational and emotional appeals).

This takes time. It requires getting close to your customers…spending lots of time watching and talking to them…getting below the surface to the true human motivations. This is the data gathering phase.

But it doesn’t stop there. I know lots of companies which brag about being fact-based operations. But facts alone are not enough. It takes intuition and creativity to convert those facts into original superior value propositions. This is the third bucket of work.

Sure, it takes time and money to go through these three steps. But this is a far more productive use of your funds than using them for bribes.

And the beauty of the whole thing is that if you do this properly, the bribes will start flowing in the opposite direction. Instead of you having to bribe others, others will start bribing you.

1) Customers may start bribing you by offering to pay a premium to achieve faster access to your products. Customers can even start to act like free sales reps, singing the praises of your product to their friends.

2) So many people will want to work for your company that they will do whatever it takes to get a job there. They may even be willing to work for free as interns in order to be a part of this great value.

3) Other firms will want to do tie-ins so that they can have their products associated with your products. They will come up with all kinds of legal bribes to try to get permission from you to do this.

With all of these benefits, it should come as no surprise that I recommend that strategic planning efforts focus around trying to come up with a position which is so compelling to your customers that bribery is unnecessary. Your strategic planning process needs to incorporate some form of these three buckets (rational, emotional, and creative).

It is more profitable to offer unique, compelling values than to push mediocre products. Pushing mediocrity requires an expensive form of bribery. However, if your value is compelling enough, people will start bribing you. Compelling values come from those who do the hard work of first leaning the deep-seated motivations of their customers (rational and emotional) and then finding a superior way to deeply satisfy them.

These days, whenever I look at advertising or an advertising budget, I imagine them as being distasteful bribes. It’s as if your advertising budget is like the $200,000 United Railroads had set up as their bribery budget back in San Francisco 100 years ago. Once you get into this mindset, one naturally starts to focus on ways to create extra internal value, so that you can get out of the distasteful business of supplementing your mediocre value with bribes.

This is not to say that advertising disappears. It just becomes more productive through informing and reinforcing the value, rather than trying to overcome the lack of sufficient value.

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